Autos hit a speed bump

Dr.Irwin Kellner

NEW YORK (CBS.MW) -- Nearly a half-century ago, "Engine" Charlie Wilson, the head of General Motors
GM, -2.10%
asserted in congressional testimony that "what was good for the country was good for General Motors and vice versa."

If this is still the case then you have to believe that when autos downshift, the rest of the country will soon follow.

The American public has once again fallen out of love with new cars (and trucks). And if the love affair doesn't rekindle soon, the rest of the economy will find it difficult to grow at anywhere near this year's 5 percent pace.

Put the blame on two factors, both dealing with cost.

Although sales appear to be running at a high level by historical standards, they are really well below their peaks, when compared with the size of the population age 20-65 -- the group most likely to purchase a new motor vehicle.

Believe it or not, in terms of sales per 100 people in this age group, the peak was reached more than a quarter of a century ago -- back in 1973. That's when new car prices were the cheapest, relative to household incomes.

Then, it cost the average family only 17 weeks' income to buy the average new car and the industry sold 13 vehicles for each 100 people of car-buying age -- a record rate.

Today, it takes 21 weeks' income to buy the average car or light truck -- and as a result, total vehicle sales are running some 15 percent off their record pace.

Sales would be even lower, were it not for the cut-rate financing deals, generous leases and cash-back discounts offered by the auto makers as a means of keeping consumers interested.

With the stock market no longer throwing off wealth the way it used to, Ford
F, -1.48%
GM, DaimlerChrysler
DCX
and the rest might have to slash prices even further, if they expect to move the metal now piling up on dealers' lots. If they don't sweeten their deals, expect more plant closings and layoffs.

Cutbacks in auto output are already spreading into other sectors of the economy, witness the unexpectedly large drop of 5.5 percent in new orders for durable goods in October. See full story.

Because light trucks now make up such a big chunk of total vehicle sales, fuel efficiency of the average motor vehicle has dropped for two years in a row -- the first time that has happened since standards were put into effect a quarter of a century ago.

As Bette Davis once said, "Fasten your seat belts, we're in for a bumpy ride."

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